Law On Minimisation Of Risks - M&A/Private Equity

The Law on Minimisation of Risks¹ came into effect on 1 February 2012 (apart from certain provisions). The main purpose of the Law is to separate Kazakh banks from expressly or impliedly affiliated structures. In addition the Law has introduced further improvements of IPO regulation and legislation relating to securities.

The most noteworthy of the provisions concerning securities regulation include the following:

Central Registrar

From 2013 all existing corporate registrars would cease to exist and there would only be one single registrar responsible for maintaining the system of registers of security holders. It is envisaged that the National Bank of Kazakhstan would own a majority stake in the Central Registrar. The establishment of the Central Registrar is supposed to improve control over the registration of transactions with securities, ensure secure storage of information and generally aid the development of the securities market in Kazakhstan.

Ownership Structure of Pension Funds

Specific conditions would become applicable to the ownership structure of Kazakh pension funds'², as of 1 January 2013:
(i) All shares shall be listed on KASE;
(ii) A pension fund shall have at least three so-called "large shareholders" (i.e. that have 10% or more shares in each case) not affiliated with each other. A single shareholder or group of affiliated shareholders shall not have more than 75% of voting shares of a pension fund. Alternatively, the total stake of minority shareholders in a pension fund must be more than 25% of voting shares.

Approval for the Listing of Securities Abroad and Placement Abroad

A new provision of the Law on the Minimisation of Risks requires that a "resident"³ of Kazakhstan receive the prior approval of the National Bank for the listing of securities on a foreign stock exchange.

Local Offer Requirement

The Law on the Minimisation of Risks obliges resident Kazakh resident not only to offer bonds on local stock exchange simultaneously with a placement on a foreign stock exchange, but to actually sell at least 20 per cent of the total issuance, if there is demand.

Insider Trading

The Law on the Minimisation of Risks has also considerably expanded the list of persons classified as "insiders" for the purposes of the Securities Law. Auditors, brokers, independent appraisers, stock exchange, state officials of the National Bank and any other persons who have access to insider information would now be considered insiders.

Representative of Bondholders

To protect the interests of the bondholders, the Law on the Minimisation of Risks has broadened the statutory powers of the so-called "representative of bondholders" so it will be empowered with the following additional rights: (i) to control the use of the proceeds by the issuer for a specific purpose, (ii) to monitor the financial position of the issuer and (iii) to file a suit on behalf of 50 per cent or more of the bondholders).

Mandatory Covenants of a Bonds Issuer

From now on, all Kazakh companies4 would have to undertake and comply with (until the expiration date of the bonds) certain mandatory negative covenants in order to issue local bonds:
(i) The issuer cannot sell more than 25% of its assets;
(ii) The issuer must not be in default under any of its obligations other than those relating to bonds for an amount greater than 10 per cent of its total assets, as of the date of state registration of the bonds issuance;
(iii) The issuer cannot make changes in its constituting documents which would alter the core business of the company; and (iv) The issuer cannot change its form of incorporation.

Central Counterparty

The Law on the Minimisation of Risks has also introduced the concept of the 'central counterparty' (the "CCP"). In theory, the introduction of the CCP shall lower the market-side risks and the costs of post trade processing (for example, as part of the introduction of the T+3 settlement by KASE). We note however that, though the CCP implementation normally requires the establishment of a special reserve and guarantee funds, the Law omits to mention this matter.

The main changes in banking legislation introduced by the Law on the Minimisation of Risks are as follows:

Limitations on Bank's Shareholding in Financial Organizations

The Banking Law, as amended, requires that a Kazakh bank's shareholding in a financial organisation (including foreign banks, insurance companies, and pension funds) shall not exceed 10%⁵ of the bank's own in relation to each financial organisation. The Law also requires that in any case the total amount of the Kazakh bank's shareholding in financial organizations shall not exceed the maximum amount established by the financial regulator (this amount is to be promulgated soon by the FMSC in its bylaws). In addition, from 1 January 2013, as a general rule, a 10% (or greater) shareholding by a Kazakh bank in financial organizations (both local and foreign) will be permissible only if the Kazakh bank has a so-called "banking holding"⁶ and meets minimum capital requirements to be promulgated by the FMSC.

Limitations on a Bank's Shareholding in Non-Financial Organizations

A Kazakh bank can acquire a maximum of 10% of placed shares/charter capital of a non-financial organization, provided that these shares meet the requirements of the FMSC bylaws soon to be promulgated.

Limitation of Bank Holding's Activity

Save for certain exceptions, as a general rule bank holdings in Kazakhstan are now prohibited from engaging in any transactions that constitute entrepreneurial activity, buying shares or stakes in companies or making any transactions with securities. Before similar restrictions were only applicable to Kazakh banks.

Limitation on Enforcement of Share Pledge

A Kazakh bank cannot become a title owner of shares/charter capital of companies to an extent greater than 10% (previous threshold was 25%) of its own capital, as a result of an enforcement of share pledges. Moreover, the law stipulates that a Kazakh bank shall even have to dispose of these shares not later than 12 months after they are acquired.

Prohibition of OTC Deals for Banks

Save for certain exceptions, Kazakh banks can now buy and sell securities and derivatives on a stock exchange only.

Limitations on Deals with "Specially Related Parties"

Kazakh banks are prohibited from providing loans and issuing bank guaranties in favor of so-called "specially related parties"⁷, unless (i) such loans or guarantees are provided to parties that are members of a banking conglomerate, (ii) the loan/guarantee is secured and the security package meets the specific requirements of the FMSC (soon to be promulgated) or (iii) these 'specially related parties' demonstrate financial stability (relevant criteria to be determined by the FMSC). Another novelty is that borrowers from now on would be required to fully disclose information on the final beneficiaries of the borrower, as well as other matters.

Permission to Have Subsidiaries

Not only Kazakh banks but also banking holdings are now obliged to seek the prior consent of the FMSC to incorporate or acquire a subsidiary. So-called "subsidiaries of Kazakh banks" cannot have their own subsidiaries.

Footnotes

1 Law of the Republic of Kazakhstan dated 28 December 2011 no. 524-IV "On Introducing Amendments to Certain Legislative Acts of the Republic of Kazakhstan in relation to Regulation of Banking Activity and Financial Institutions in respect of Minimisation of Risks".

2 These legal requirements would not be applicable only to pension funds if one of its shareholders is the Republic of Kazakhstan.

3 For the purposes of the Securities Law, residents of Kazakhstan shall be considered companies incorporated outside of Kazakhstan if their place of management is de facto in Kazakhstan or if two thirds of their assets are located on the territory of Kazakhstan.

4 These statutory restrictions are not applicable to banks and organisations under restructuring, as provided in relevant laws.

5 Before the investment limit was 15% of the bank's own capital as per each financial organization, and there was no limit on the total amount of a bank's shareholdings in financial organizations.

6 A bank holding is a legal entity that with prior consent of the FMSC (Kazakh financial regulator) owns, directly or indirectly, 25% or more of placed shares of a Kazakh bank.

7 The"specially related parties" definition covers, inter alia, (i) management of the bank and relatives of the management, (ii) a socalled "large participant" (a person holding 10% or more voting shares in the bank) and their relatives, (iii) affiliates of the bank etc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Kazakhstan: Law On Minimisation Of Risks